December 28, 2018
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the assessment of individual income tax issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2016.
FACTS
The Taxpayers filed a part-year resident individual income tax return for the 2016 taxable year and claimed the credit for low income individuals (the “Credit”). Under review, the Department denied the credit and issued an assessment. The Taxpayers appealed, contending they were permitted to subtract income earned during the period of residency outside of Virginia for the purposes of computing the Credit.
DETERMINATION
Pursuant to Virginia Code § 58.1-339.8, taxpayers with a family Virginia adjusted gross income at or below the corresponding amount listed in the federal poverty guidelines may claim a Virginia income tax credit equal to $300 each for themselves and any dependents claimed on their Virginia income tax return. For purposes of the Credit, “family Virginia adjusted gross income” is defined as “the combined Virginia adjusted gross income of an individual, the individual’s spouse, and any person claimed as a dependent on the individual’s or his spouse’s income tax return for the taxable year.” In addition, Virginia adjusted gross income “has the same meaning as the term is defined in § 58.1-321” for purposes of the Credit. See Virginia Code § 58.1-339.8.
The Taxpayers argue Virginia’s statutes do not set forth a computation of family Virginia adjusted gross income for part-year residents nor preclude a deduction for the nonresident portion of a part-year resident’s income. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell’s Motor Freight, Inc., at al. v. Virginia Department of Taxation, 1 Va. Cir. 382 (1983). Virginia adjusted gross income is defined in Virginia Code § 58.1-321 as “federal adjusted gross income for the taxable years with the modifications specified in §§ 58.1-322.01 and 58.1-322.02,” pertaining to certain additions and subtractions to FAGI not at issue in this case.
For part-year residents, income earned outside the period of Virginia residency is still included in a taxpayer’s FAGI, and Virginia Code § 58.1-339.8 does not allow a deduction for such income for purposes of computing the Credit. The form instructions for part-year resident income tax returns are consistent with the statute in that the computation worksheet starts with FAGI and provides lines to add or subtract income as required under the provisions of Virginia Code §§ 58.1-322.01 and 58.1-322.02. Therefore, the Taxpayers were not permitted to deduct income earned outside of their period of Virginia residency for purposes of computing the Credit.
In addition, it would violate the public policy of the Credit to allow part-year residents to deduct income earned outside of their period of Virginia residency. High income taxpayers could obtain the benefit of the Credit merely because of the timing of their moves. For example, most of a high income taxpayer’s income for a given taxable year could be attributable to a period of residence outside Virginia, such that he could be eligible for the Credit based solely on the smaller amount of income he earned after becoming a Virginia resident. The Credit, however, is intended to provide tax relief to low income taxpayers, not high income taxpayers who could benefit from the favorable timing of a move.
Accordingly, the assessment is upheld. The Department’s records indicate that the assessment has already been paid. Therefore, no further action is required.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1828.M